MNI POLICY: RBA Sees China Slowdown Risk For Financial System

By Lachlan Colquhoun

     SYDNEY(MNI) - A "generalised" economic slowdown in China would have a

"large impact" on Australia's domestic economy and impact negatively on the

country's financial system, according to the Reserve Bank of Australia.

     The RBA's six-monthly Financial Stability Review, released today, said the

Australian financial system remains "resilient" but that offshore downside risks

have increased this year, cites the U.S.-China trade dispute, tensions in the

Middle East and in Hong Kong, Brexit uncertainty and the danger of disruptions

from climate change.

     On China, the RBA notes Australian exports are "disproportionately used in

the Chinese domestic economy" rather than in the supply chain of China's export

industries.

     "Australian exports may therefore decline by proportionately less than

global trade in response to an escalation of trade disputes if Chinese domestic

growth is maintained," the Review says.

     "But a more generalised slowdown in China could have a larger impact on

domestic growth and hence the financial system."

     The biggest risks for Australia, according to the RBA, come from a global

shock such as a geopolitical event, a negative growth shock or a "major credit

event."

     Rising asset prices in a low-interest-rate environment is an ongoing theme

of the Review, with the RBA identifying longer-term risks both domestically and

internationally.

     "Asset prices are vulnerable to a destabilising correction if risk premiums

were to rise suddenly," the Review said.

     "Asset price falls or reduced availability and increased cost of borrowing

could be quickly transmitted to Australia through trade and financial links."

     Domestically, the Review gave a detailed analysis of the Australian housing

market with the Bank noting that although risks have receded and prices in the

key Sydney and Melbourne markets are recovering, household debt remains at

around 190% of household income.

     While three quarters of mortgage debt is owed by households with high

capacity for repayment, around 30% of borrowers have less than one month's worth

of prepayments.

     "The housing market is a key source of potential systemic risk that needs

to be monitored closely, with housing accounting for 40% to 50% of household and

bank assets," the Review says.

     "Rising unemployment or ongoing weakness in income growth would likely see

an increasing share of households struggle to make their debt repayments."

     The Review identified Western Australia and the Northern Territory as most

vulnerable, with over half of all loan balances in negative equity.

     While house prices on the eastern seaboard are increasing, prices in these

two markets continue to fall.

     "A further 10% decline in housing prices in WA and the NT is estimated to

result in the share of loan balances in negative territory in those regions

increasing from a little under one-fifth to one-third," the Review says.

     Looking to the medium term, the RBA has also warned of "rapid" property

price growth fuelled by low interest rates and potential supply shortages.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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